IG notes risks associated with disproportionate leverage restrictions

Maria Nikolova

“The danger of disproportionate leverage restrictions on regulated firms is the risk that they will push retail clients to trade CFDs with unregulated firms based outside the EU potentially resulting in poor client outcomes”, IG warns.

Following the statement by the European Securities and Markets Authority (ESMA) on Friday about the regulator reviewing certain restrictions concerning binary options and CFD offering to retail clients under review, electronic trading major IG Group Holdings plc (LON:IGG) today posted its response to the statement.

Although IG said it is supportive of the objectives of regulators to improve client outcomes in the industry, it noted that the leverage restrictions considered are out of proportion. Let’s recall that ESMA is reviewing leverage limits on the opening of a position between 30:1 and 5:1, with the limit to vary according to the volatility of the underlying asset.

“IG believes that the leverage restrictions under review are disproportionate and go beyond what is needed to protect consumers from poor outcomes associated with excessive leverage.”

The company said that the danger of disproportionate leverage restrictions on regulated firms is the risk that they will push retail clients to trade CFDs with unregulated firms based outside the EU potentially resulting in poor client outcomes.

IG emphasized that it approves the enforcing of consistent close-out procedures, putting a guaranteed limit on client losses, restricting trading incentives such as bonus offers, and issuing standardised risk warnings, as such measures would all improve client outcomes if implemented appropriately, and enforced effectively.

Regarding binaries, IG stopped offering its Sprint binary product to new retail clients in January 2017. Revenue from binaries traded by clients in the UK and EU has therefore reduced, and represented less than 5% of IG’s revenue in the first half of the current financial year, the company explained today.

IG believes that any financial impact from the implementation of the prohibition on binary options and the restrictions on CFDs being considered by ESMA is unlikely to be significant in the current financial year.

IG stressed that all the measures that ESMA and the UK Financial Conduct Authority (FCA) are considering relate to retail clients. IG notes that that it launched its online process that allows clients to apply to be categorised as an elective professional in mid-November 2017. Since then, the proportion of IG’s UK and EU revenue generated by professional clients has increased from 5% to 15%, despite there being limited current advantage to them being categorised as such.

IG believes that clients representing well over half its current UK and EU revenue are eligible to be categorised as professional and will elect to be treated as such if the products that they can trade and the leverage they can utilise diverges from that available to retail clients.

IG anticipates that any reduction in historic annual revenue from the implementation of the measures currently being considered by ESMA, taking into account the actions being taken by the business to mitigate the impact, would have been less than 10% including the impact from lower binary revenue.

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